Three sectors for a UK recovery
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Will the UK catch up with the US?
Published
September 4, 2024
The broader global recovery since March lows this year has been lumpy and unequal.
US tech aside, shares getting back to pre-pandemic levels has been a bit of a crapshoot.
Some companies like William Hill and Watches of Switzerland have benefited from consumers changing their spending habits during lockdown, and look likely to end the year on a high.
Others, like Carnival and Cineworld have had to wade through the summer in the hope that it can’t get any worse.
It’s as if there’s a corporate waiting room and only the fortunate few get to see their number appear on the screen. And even they don’t know when or if it’ll come up.
The US has done well from the main beneficiaries pulling the whole market up with them.
Even a close-fought presidential election wasn’t enough to derail a recovery that has seen new market highs on the other side of the Atlantic.
But it’s been nearly exactly the opposite story in the UK.
A dearth of big tech and a drawn-out Brexit saga have conspired to keep the UK market well below its Q1 levels, nevermind talk of new highs.
A lot of the US outperformance of UK equities even pre-pandemic was thanks to their tech leaders and investors steering clear of the UK, with the Brexit storyline seeming so uncertain.
In fact, the US currently sits just behind healthcare in investors’ favourite overweight positions this year. The UK is among the least favourite, and would be bottom if not for the energy sector.
And the gross domestic product (GDP) hit has favoured the US too, with figures over the Atlantic stumbling nearly 10% in the second quarter and the UK down 20%, making the latter the worst impacted among major Western peers.
But that’s the bigger picture.
What’s the story on the ground?
If we look at the US companies which have yoyo-ed back up this year, and put them beside their sector cousins here in the UK, how do they compare?
Have the Americans just been dragged back up because of the tech party or do they serve as a premonition of what could happen to UK stocks once the blockers are lifted?
Here are three US-UK pairings which could help us understand the disconnect, and how it could change in 2021.
Normally in a recessionary environment, people find themselves counting the pennies and keeping the purse strings tightly guarded. It hasn’t played out like that this time.
Despite furlough and job losses, the real consumer hit has been from simply not being able to get out and spend.
That means there are pent-up earnings sitting on the side lines. And we’re getting glimpses of those earnings wanting to find a home.
Quite literally.
Rightmove reported its busiest month in July, eclipsing its previous highs in February this year by some margin. July had the most sales for ten years.
According to Alex Wright, manager of the Fidelity Special Values investment trust, UK house prices growing, transactions rising and pent-up demand are all supportive trends.
But what about the view that the UK’s stamp duty holiday is simply fuelling a short-term uptick?
“I don’t think it is.” said Wright in a November webcast, “When we look at the US which doesn’t have that short-term boost you’re seeing the same trends.”
After initial share price falls when construction sites were closed in both countries, the likes of US housebuilder Lennar has seen a strong bounceback. Wright thinks this reflects all the positive catalysts above.
On the other hand, UK builder Vistry hasn’t yet found that upward momentum despite having many of the same tailwinds in Wright’s eyes.
Whether there is a delayed response in the UK housing sector, or any response at all yet to come, is still very much up for debate.
But starting from a low base, with seemingly supportive fundamentals intact, has caught the contrarian manager’s eye.
Remember, past performance is no guarantee of what might happen in the future and these companies are just used to illustrate the point - they aren’t intended as investment advice. The manager might have also changed views since then.
Another face-off is in the consumer electronics sector. Both Best Buy in the US and Dixons Carphone in the UK have high market shares and both have a noticeable presence online as well as on the high street.
A whole lot of tech upgrades to work and entertain ourselves from home have given both companies a bounce but, for Wright, Dixons still hasn’t reflected the fundamentals that have lifted Best Buy.
In his mind, it’s not a case of the US stock overshooting and could instead be that the UK company has been sluggish to factor lockdown sales into the price so far.
In the car market, there’s a similar story at play.
Strong trends have emerged in consumers coming back to the second hand car market. And because of the lack of supply, prices have gone up - a good sign for dealers.
For US firm CarMax this has prompted a V-shaped recovery pretty much taking the shares back to where they were this time last year.
And while UK dealer Inchcape is showing signs of coming back - especially as overlooked value stocks receive more attention - it’s still down on the year with a far from V-shaped spring back.
For me, the main points here are that we shouldn’t just hit ‘buy’ when we see a low price. After all, how do we know if we’re going to get a Lennar or a Vistry?
But when we do buy, we should buy into the fundamentals, not the share price.
The basic building blocks of the companies we look at tell us a lot more about them and the opportunity set in front of them than the flashing numbers on our screens.
This can allow us to see where the pricing anomalies are, where the market isn’t being efficient, and gives us the chance to take part in any recovery that might come along.
Sources:
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